Do Emerging Markets Beat Developed Markets?

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Posted: Jun 15, 2020 9:13 AM
Do Emerging Markets Beat Developed Markets?

Source: AP Photo/Andy Wong

Countries with stock markets are classified at frontier, emerging (EM), and developed (DM), in order from least wealthy and developed to most.  Of course, a natural question would be "Which markets tend to perform better?"

Let's look at the most recently available data at of the time of this analysis:

Statistic

Value

Total Periods

42

Negative Periods

24

Positive Periods

18

% Negative

57.1429%

% Positive

42.8571%

Wght’d Avg Correlation

-0.0737

We looked at 42 six-month periods. The level of development had a negative correlation with performance 24 times, or 57% of the time. That amounts to a negative correlation of 7%. That is to say, EM tends to outperform DM the majority of the time, but it's not a strong majority.

But it does add up to a significant amount of overperformance. Let's imagine that we had created an investment made up of two buckets. One is filled up with equal amounts of each EM country's stock index, and the other is filled with equal shares of each of the DM countries. Let's say we then tracked six-month performance, and then averaged together the performances for all of the periods in our data set. Here's the average performance for the two categories:

Value

All

0

0.0581

1

0.0408

Differential

0.0173

The 0 group is emerging, and the 1 group is developed. The average difference in returns is 1.7% for each six-month period, which adds up to almost a 3.5% difference per year. That's substantial. So, even though the EM edge is not reliably present, when it is present, it adds a significant amount of performance.